Argentina Seeks to Resolve Defaulted Debt Issues

Argentina Seeks to Resolve Defaulted Debt Issues, While “Vulture Funds” Are Determined to Undermine Process

by COHA Director Larry Birns and COHA Research Associate Nicholas Maliska

- Ill-reputed funds threaten to seize Argentine state assets by means of Public Seizures

The Argentine government recently announced a plan to offer a debt swap to investors still holding US$20 billion (plus interest) in unpaid bonds from the country’s 2001 debt default. Economy Minister Amado Boudou stated on November 7 that a proposal would be made within 30 days, which, once accepted, will likely enable the Argentine government to begin to access vital international capital markets of which it has been excluded since that year. While three banks, Barclays, Citigroup, and Deutsche Bank, representing roughly US$10 billion of the remaining defaulted bondholders, appear ready to accept this deal, a group of “vulture funds” continues to render negotiations difficult by pushing to receive the full face value of the bonds that they bought on secondary markets for pennies on the dollar. These organizations, the majority of which are based offshore the U.S. beyond effective regulation and taxation, have been using U.S. courts and unremitting Congressional pressure to compel the Argentine government to pay the full face value of these bonds. In this struggle, the “vulture funds” have found Congressman Eric Massa (D-NY) to be of inestimable value.

Deep in Debt

The present situation in Argentina stems from gross economic mismanagement in the country dating back to its military Juntas of the 1970’s and 1980’s. The country’s foreign debt skyrocketed from US$7 billion in 1976 to US$45 billion in 1983 to allegedly support large military spending projects, but much of it was siphoned off in massive corruption schemes amounting to billions of dollars. Although the IMF attempted to intervene with debt restructuring plans, such as the Brady Plan in 1992, in order to reduce the country’s debt burden, not nearly enough was done in this direction and Argentina’s debt grew to an astonishing 200 percent of its GDP by 2001.

Argentina slid into a deep recession in 1999 and by 2001, the country could no longer afford to make payments on its debt, as starvation became common in urban areas throughout the country. The government was forced to default on roughly US$81 billion in bonds in December, 2001. The economic crisis had a profound effect on the country; unemployment peaked over 20 percent and poverty was rampant. Nevertheless, soon after Argentina defaulted on its debt, the country’s economy actually began to recover in terms of its GDP, growing by 8.8 percent in 2003.

In 2005, the majority of the country’s bondholders accepted an offer made by the Argentine government for a debt swap where the investors received roughly 30 cents on every dollar for the old bonds and in some cases the yield of the new bonds was tied to the country’s economic growth. All told, 76 percent of the stakeholders accepted this deal, but the rest, including the “vulture funds,” abstained from the negotiations and held onto the face-value US$19.4 billion in bonds to try to get a better deal in the future. The Argentine Congress also passed the “Ley Cerrojo” or Bolt law in 2005, which banned any other negotiations with defaulted bondholders who might decline to accept the 2005 agreement.

Beginning in 2008, President Cristina Fernández de Kirchner stated that the Argentine government was ready to reopen negotiations with the remaining bondholders to settle their outstanding claims. However, the 2008 worldwide economic downturn put a damper on these negotiations as investors were hesitant to risk investing in all but the safest securities. Now that developing markets once again are being sought after for investment, the possibility of a deal with bondholders has reemerged. The Argentine Congress is expected to suspend the 2005 Bolt law, so that the country can put out an offer once again. Thus far, the Argentine lower legislature has passed a bill to reopen discussions of a debt swap with the holdouts, while the Senate will be debating the issue in the coming weeks, which it is also expected to approve. Details regarding the new debt swap have not been released, but it is likely to have even less alluring conditions than the 2005 agreement and is reported to come at a 65 percent discount.

What are the “vulture funds?”

The “vulture funds” are investment groups that scour the financial centers of the world in order to buy distressed or defaulted debt at absurdly low prices. They then litigate in courts and use other strong-arm tactics to pressure the issuing countries to pay the bonds’ full face value, although the “vulture funds,” themselves, had paid much less for the bonds. The “vulture funds” typically win these court cases and then seek to freeze and / or seize the state’s assets in order to force the government in question into settling the dispute to the gross advantage of the funds. Argentina has not been the first country to become a hapless target of the heinous practices of the “vulture funds,” and Ecuador, Peru, and the Congo have faced similar situations. For example, after Peru defaulted on its debt in the 1990’s, a “vulture fund” called Elliot Associates L.P. bought some of the country’s defaulted debt for US$11 million on the secondary market and then sued the country in U.S. Federal Court, which ruled in its favor. The Peruvian government ended up having to pay the “vulture fund” $58 million, representing a profit of over 400 percent.

The “vulture funds” currently hold several billion dollars of Argentina’s defaulted bonds, and although for the most part they were not the original owners, they are now some of the most active stakeholders and have kept legitimate bondholders from reaching a realistic agreement with the Argentine government. One of the largest of these investment groups is Elliot Associates LP, whose subsidiaries had at least US$182 million in face value instruments when they sued Argentina in the New York Federal Court. Paul Singer, the founder of the “vulture fund,” Elliot Associates LP, has insisted that his investment group does not attack any country that cannot legitimately pay its debt. Nevertheless, the true nature of his enterprise became apparent when he stated in an interview with Bloomberg that “our Primary goal is to find bankruptcy situations where our ability to control or influence the process is the driver of value.” Although he is talking about bankrupt companies in this instance, the same philosophy is applicable for countries that fall into bankruptcy-like situations, in which case, his company can be expected to play the role of predator.

As of September, 2009, over 100 cases had been brought against Argentina in the New York Federal District Court, where many of the bonds were sold on the New York Stock Exchange. Other lawsuits similarly have been filed in jurisdictions around the world where Argentina issued its bonds. The cases in New York have been presided over by Judge Thomas P. Griesa, who systematically has decided against Argentina in numerous proceedings.

However, winning court cases in this country has had little effect in inducing Argentine officials to pay, and the “vulture funds” have had little luck in seizing Argentine assets abroad. Instead, the “vulture funds” have sought out U.S. Congressional members by forming a lobbying group, American Task Force Argentina, in order to place Washington’s pressure on the Argentines. They have persuaded 24 Representatives to support an initiative that would compel the Argentine government to fully pay on its defaulted debt, even though many of the current bondholders paid much less than the full value of the bonds.

H.R. 2493 – the Judgment Evading Foreign States Accountability Act – is sponsored by Eric Massa, a Democratic Representative from upstate New York, who narrowly won his seat in what is traditionally a Republican district. Although the bill has no chance of passing, its existence nevertheless puts pressure on Buenos Aires and gives opposition parties in Argentina unwarranted grounds to attack the present administration. This bill can be viewed as lobbying at its worst: self-interested investors support vulnerable legislators, usually with generous campaign contributions, to sponsor an initiative regardless of the harm it does to either this country or its allies, which like Argentina can be strategically important nations. Massa, who also introduced legislation to limit the interest rates that credit cards can impose on customers, is far off course on this bill. However, there is also an opposing bill, H.R. 2932, the Stop VULTURE Funds Act, which seeks to restrict the heinous practices of ill-reputed investors whose business is to profit off of the economic collapse of other countries.

Argentina and International Capital Markets

Argentina’s defaulted debt has had a profoundly detrimental effect on the country’s economy and its political process, as it has limited the government’s access to international capital markets. While it was almost immediately able to begin recovering from its economic collapse some three months after it defaulted on its debt, Buenos Aires has been barred from issuing new global bonds in international capital markets. Possible lenders view Argentina’s 2001 default, and the country’s inability or unwillingness to settle the dispute with a greater percentage of its bondholders, as an indication that they are a high-risk investment. Argentina has therefore been forced to seek loans from countries at interest rates much higher than those on international capital markets. Argentina’s budget is currently stretched thin as government expenditures have risen during the global recession and access to international capital markets is becoming more and more necessary in order to stabilize the country’s future.

A debt swap with the majority of the remaining bondholders will almost certainly bring confidence back for Argentina on international credit markets. Presently, the Argentine government has reached an agreement with some 76 percent of the bondholders dating back to its 2005 negotiations. However, the international financial community does not consider this a sufficient effort to settle its debt. With the addition of Barclays, Citigroup, and Deutsche bank, who together hold or represent roughly US$10 billion of the defaulted bonds, this number will come closer to 90 percent, at which point investors are likely to be satisfied that Argentina has made a good-faith effort to settle its debt and the country will now once again be allowed to access international capital markets. Other bondholders are also likely to join in with the three large banks and accept the new agreement. The “vulture funds” can be expected to continue litigating and lobbying so as to squeeze as much as they can out of Argentina, but the present government is determined not to appease them. Economy Minister Boudou recently asserted that the U.S. must isolate the “vulture funds” as they continue to undermine a solution to the country’s outstanding debt with legitimate investors.

-This is the first of a series of research findings to be issued by COHA, along with associated research organizations on the “vulture funds,” as well as the role of the U.S. Congress and Congressman Eric Massa (D-NY) in pressuring Argentina to facilitate the acquisition of billions of dollars in windfall profits from nations, such as Argentina, who are the least able to spare them.

Please click here to view the letter which COHA sent to Congressman Eric Massa and the co-sponsors of H.R. 2493, the Judgement Evading Foreign States Accountability Act.

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This analysis was prepared by COHA Director Larry Birns and COHA Research Associate Nicholas Maliska
Posted 10 Nov 2009
Word Count: 1900

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